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Debt Relief Plan Eludes IMF Group

Issue Likely to Be Resolved Next Year

By Paul Blustein

Washington Post Staff Writer
Sunday, October 3, 2004; Page A28

Rich nations failed to agree at meetings this weekend on a plan for canceling the debts the world's poorest countries owe to the World Bank and International Monetary Fund. But top U.S. and British officials voiced confidence that an accord will be struck next year to dramatically expand debt relief for several dozen nations in sub-Saharan Africa, Latin America and Asia.

The IMF's top policy-making committee issued a statement yesterday pledging only "further consideration" of large-scale debt forgiveness for poor nations, underlining that sharp differences remain over major problems such as how to cancel debts without hurting the fund and the bank. Nevertheless, Gordon Brown, Britain's chancellor of the exchequer and a leading debt-relief champion, contended that the meetings had helped to advance the cause of extending debt reduction for poor countries well past the current levels of about 50 percent.

"There's a growing consensus that the next step is [to give poor countries] up to 100 percent debt relief," Brown said at a news conference, adding that although "there's a lot of work to be done," it concerns "the detail" rather than the principle, and is likely to be resolved in 2005. Britain, he said, chairs the Group of Seven major industrial nations next year and will host the annual summit of leaders from those countries plus Russia.

The Bush administration, which has been working on a debt-relief proposal that departs from Brown's, also thinks that 2005 offers a particularly promising time to forge a deal, said a senior U.S. Treasury official who briefed reporters on condition of anonymity. He noted that negotiations are scheduled then to discuss how much rich countries should contribute over the following three years to the World Bank's lending program for poor countries. The administration has used such negotiations as leverage to change bank policies on previous occasions.

Granting 100 percent forgiveness to the world's "heavily indebted poor countries" would go much further than previous plans that were launched in 1996 and expanded in 1999 for nations such as Uganda, Bolivia and Cameroon. Those plans, although initially hailed by aid advocates as major breakthroughs, have failed to lift many of the two dozen or so countries that qualified out of their debt traps. In some cases, as soon as countries' debts were reduced, they experienced a new economic shock, such as a drop in the price of an important export, so their debt burdens remained high relative to their economic output.

Aid groups fervently lobbied for a new agreement at this weekend's meetings, but even though that didn't happen, "we now think 100 percent is inevitable," said Seth Amgott, a spokesman for Debt AIDS Trade Africa, an organization founded by the rock star Bono to promote aid for Africa. "We will be out of tinkering with a broken system. The existing initiative, while it's generated substantial savings, doesn't free poor countries from the cycle of debt."

But German Finance Minister Hans Eichel told reporters, "I do not agree to proposals that the multilateral institutions should forgive debt."

Moreover, it is far from clear how the gap will bridged between the approaches being promoted by Washington and London. Brown's plan would involve billions of dollars in firm commitments by wealthy nations to ensure that the World Bank has the funds to keep providing aid. The commitments envisioned in the U.S. plan are much flimsier, and Washington's proposal also includes the idea of replacing many World Bank loans with grants, which some critics fear would weaken the bank.

On the related issue of forgiving Iraq's debt, the United States remained at odds with other nations, particularly France, over how much of Baghdad's roughly $120 billion debt should be written off. The Bush administration contends that a write-off of between 90 and 95 percent is required to give the Iraqi economy a chance to flourish, while major creditors such as France, Russia and Germany have said a reduction of about 50 percent is in order.

Formal negotiations between Iraq and its creditors haven't begun yet because to get such debt relief a country needs to have struck an agreement on its economic policies with the IMF, and the fund only approved Iraq's program on Wednesday. Reiterating previous U.S. assertions that a debt deal for Iraq is possible by year's end, Treasury Secretary John W. Snow told a news conference yesterday, "I sense broad agreement on the large proposition" that the bulk of the debt must be forgiven. French Finance Minister Nicholas Sarkozy told reporters that differences have narrowed.

The issue of debt forgiveness for Iraq is different from the questions surrounding poor nations because Iraq owes almost all of its debt to individual governments while the vast bulk of the debt burdening poor nations is owed to the IMF, the World Bank and other multilateral lenders. But politically, the two issues have become linked, with France and Germany in particular questioning why Iraq should get much greater relief than countries whose people are much poorer. Resolving the poor-country debt problem would help address that objection, although U.S. officials assert that the two issues should be treated separately.